, (2) LIFO, and (3) weighted average Effect of inventory cost flow on ending inv
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, (2) LIFO, and (3) weighted average Effect of inventory cost flow on ending inventory balance and gross margin 5-5A LO 5-1 The Shirt Shop had the following transactions for T-shirts for 2016, its first year of operations: Jan. 20 Apr. 21 July 25 Sept. 19 Purchased 400 units @$ 8 Purchased 200 units$10 Purchased 280 units@ $13 Purchased $3,200 2,000 3,640 1,350 90 units @$15 During the y ear, The Shirt S hop sold 810 T-shirts for $30 each. Required Compute the amount of ending inventory The Shirt Shop would report on the balance a. assuming the following cost flow assumptions: (1) FIFO. (2) LIFO, and (3) weigh avernsd the above transactions in general journal form and post to T-accounts assuming weighted average methods Use a separate set of journal entries . Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions ) FIFO, (2) LIFO, and (3) nts for each method. Assume all transactions are cash transactionsExplanation / Answer
Answer - Part a) 1. Valuation Under FIFO method: Under FIFO Method, it is assumed that the inventory which is purchgased first has to be sold first. Hence, going by the above assumption we can conclude the below as the cost of Inventory under FIFO method:
Total number of Shirts purchased - 970 (400+200+280+90)
Total number of Shirts sold - 810 (Given)
Hence, as per the definition of FIFO method we can conclude that the balance inventory has to be from the last to slots i.e. Balance Inventory - 160 Shirts (970-810). Last inventory purchased - 90 Shirts, hence the balance of shirts remaining would be from the inventory purchased before the last inventory.
Therefore, Valuation of Inventory under FIFO would be:
90 Shirts @ 15 - $ 1,350
70 Shirts @ 13 - 910
Total Inventory Value under FIFO Method- $ 2,260.
Part a) 2. Valuation under LIFO method: Under the LIFO method, it is assumed that the inventory is purchased the last will be sold first.
In the given problem, we will assume that all the inventory has been sold after the last inventory has been purchased.
Hence, going by the above definition of the LIFO method valuation of Inventory Under LIFO would be as under:
Total Inventory purchased - 970 Shirts
Total Inventory Sold - 810 Shirts.
Hence, the difference of the number of shirts purchased and sold i.e. 160 Shirts will be from the 1st lot purchased as there were 400 shirts purchased in the lot.
Hence, the Valuation of Inventory under LIFO method will be $ 1,280 (160 Shirts * 8).
Part a) 3. Weighted Average Method: Under the weighted average method inventory is valued from the average pruchase value per unit of the goods. i.e. total purchase cost divided by total number of units purchased.
Hence, as per the above definition, valuation of Inventory under weighted average cost will be:
Total units purchased - 970 Shirts
Total purchase Cost - $10,190
Weighted Average Cost per unit - 10,190 / 970 = 10.50
Hence, the valuation of Inventory under Weighted Average Cost per Unit is $ 1,680. (!60 Shirts * 10.50)
Part b) Journal Entry of the above calculations:
1. Under FIFO method -
Purchase Entry:
Inventory A/c Dr - 10,190
To Cash / Bank A/c - 10,190
Sales Entry:
Cash / Bank A/c Dr - 7,930
To Sales A/c - 7,930
Closing Stock Entry:
Sales A/c Dr - 7,930
To Inventory A/c - 7,930
Hence, Inventory account will be left with a closing balance of $ 2,260.
1. Under FIFO method -
Purchase Entry:
Inventory A/c Dr - 10,190
To Cash / Bank A/c - 10,190
Sales Entry:
Cash / Bank A/c Dr - 7,930
To Sales A/c - 7,930
Closing Stock Entry:
Sales A/c Dr - 7,930
To Inventory A/c - 7,930
Hence, Inventory account will be left with a closing balance of $ 2,260.'
1. Under FIFO method -
Purchase Entry:
Inventory A/c Dr - 10,190
To Cash / Bank A/c - 10,190
Sales Entry:
Cash / Bank A/c Dr - 7,930
To Sales A/c - 7,930
Closing Stock Entry:
Sales A/c Dr - 7,930
To Inventory A/c - 7,930
Hence, Inventory account will be left with a closing balance of $ 2,260.
2. Under LIFO method:
Purchase Entry:
Inventory A/c Dr - 10,190
To Cash / Bank A/c - 10,190
Sales Entry:
Cash / Bank A/c Dr - 8,910
To Sales A/c - 8,910
Closing Stock Entry:
Sales A/c Dr - 8,9,10
To Inventory A/c - 8,910
Hence, Inventory account will be left with a balance of $ 1,280.
3. Under Weighted Average Method:
Purchase Entry:
Inventory A/c Dr - 10,190
To Cash / Bank A/c - 10,190
Sales Entry:
Cash / Bank A/c Dr - 8,510
To Sales A/c - 8,510
Closing Stock Entry:
Sales A/c Dr - 8,510
To Inventory A/c - 8,510
Hence, Inventory account will be left with a balance of $ 1,680.
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